April 15th, 2015 9:17 AM by Jackie A. Graves
Recovering from a
negative credit event like a foreclosure can take years—seven years in many
A growing number of Americans are reaching that
juncture after going into foreclosure early in the housing crisis.
During that seven-year
period, gaining access to loans is challenging, particularly in the first two
to three years. Getting approved for a car loan or credit card is possible,
though the interest rates you’ll be charged will be high. But finding a lender
that will give you a mortgage will be a lot harder in most cases.
Foreclosures stay on
consumers’ credit reports with the three main credit-reporting firms—Equifax,
Experian and TransUnion—for up to seven years and are factored into their FICO
credit scores for all of that period. The seven-year period also applies to
short sales, settlements with credit-card companies or other lenders, and other
negative events. Bankruptcies can stay on for 10 years.
Millions of consumers are
feeling the impact of the seven-year timeframe in the wake of foreclosures
after job losses, pay cuts or other setbacks from the last downturn. To figure
out when a negative mark is due to be dropped, borrowers can check their credit
reports from each of the three firms, which they can do free once every 12
months atannualcreditreport.com. The reports will list the year the negative event was
Here are some pointers on
how to increase your chances with mortgage lenders if you have a black mark on
your credit record.
People who have only a
few months left before a foreclosure or other negative credit event gets
removed from their credit reports could benefit by waiting it out before
applying. When lenders check your credit reports, they won’t see that you went
through a foreclosure—information that could make them second-guess approving
an applicant or charge them a higher interest rate.
However, if another year
or so needs to pass until the black mark is removed from your credit reports,
and you want to get a mortgage, waiting may not pay off, says John Ulzheimer,
president of consumer education at CreditSesame.com, a credit-management site.
Mortgage rates may be higher down the road. Even borrowers who don’t have the
highest credit scores could end up getting a better interest rate now than if
they wait until the foreclosure is removed from their report, he says.
There are some caveats to
be aware of. The application form that many lenders require applicants to fill
out asks several questions about foreclosure, including whether they’ve ever
been through one—information that could make a lender think twice about an
applicant. Mortgage giants Fannie Mae and Freddie Mac have their own waiting period, which is as long as seven years
after the foreclosure has been completed—which could be a few years after it
comes off your credit reports.
One of the fastest ways
to improve your FICO score is to pay down your credit-card debt, and, if
possible, pay it off entirely. A comparison of this debt with the overall
credit-card spending limits a borrower has contributes to a category that
accounts for 30% of consumers’ FICO scores.
The change can be
reflected in your credit report within a month and will quickly improve your
score, says Mr. Ulzheimer. FICO scores, developed by Fair Isaac Corp., are the
credit scores used in most consumer-lending decisions.
A Fair Isaac analysis of
people who had foreclosure proceedings added to their credit reports between
October 2007 and October 2008 found that 69% of those borrowers whose FICO
scores had recovered and were at least 680 by last October had revolving debt,
such as credit-card debt that equaled less than 30% of their total credit-card
spending limits. None of them had maxed out credit cards
Signing up for car loans,
furniture or appliance financing, and many other loans can hurt an applicant’s
chances of getting approved for a mortgage. Lenders review borrowers’ debt
compared to their income to determine whether they can get a home loan and its
In addition, the FICO
score factors in credit inquiries—when lenders check your credit when you apply
for a loan or credit card—that are up to 12 months old. The applications you
make within the year prior to applying for a mortgage could lower your score.
Make sure to pay your
bills on time and to not get into trouble with any loans. Otherwise, you’ll be
at risk of starting the seven-year period from scratch and seeing your score
drop again if a lender reports a negative credit event to the credit-reporting
By: Annamaria Andriotis |
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